Oil extraction hits snag over tax wrangles

A PLAN to start extracting and refining Uganda’s oil has hit a snag due to tax disagreements between an exploration company and the Government.

Heritage Oil and Gas Company Ltd has to sell its interests to a richer company that has the resources to extract and refine the oil, but does not want to pay taxes on the sale.

The Government, on the other hand, insists Heritage has to pay the capital gain tax amounting to over 800b.
Heritage is now seeking arbitration with the London-based United Nations Commission for International Trade Law (UNCITRAL), a process that usually takes years.

President Yoweri Museveni has often said local oil production would create jobs, address shortage of petroleum products and lower the prices. Uganda currently needs about 11,000 barrel of oil per day.

Production was expected to start next year with heavy fuel oil and gas, later to be followed by paraffin, diesel, petrol and aviation fuel. But now Ugandans will have to wait longer for the $1.5b project.

Heritage wants to sell its interest in oil blocks 1 and 3A to either Italian giant ENI spa or Tullow Oil and is supposed to earn $1.5b from the sale.

The transaction requires that a prospective buyer immediately pays $1.35b and a further $150m or surrender a stake in a producing oil field of a similar value within two years.

President Yoweri Museveni has often said local oil production would create jobs, address shortage of petroleum products and lower the prices.

Uganda currently needs about 11,000 barrels of oil per day.

Production was expected to start next year with heavy fuel oil and gas, later to be followed by paraffin, diesel, petrol and aviation fuel.

But now Ugandans will have to wait longer for the $1.5b project.

Heritage wants to sell its interest in oil blocks 1 and 3A to either Italian giant ENI spa or Tullow Oil and is supposed to earn $1.5b from the sale.

The transaction requires that a prospective buyer immediately pays $1.35b and a further $150m or surrender a stake in a producing oil field of a similar value within two years.

But after negotiations with the Government collapsed, Heritage on Thursday issued a statement saying the sale could not start immediately.

“Heritage’s position, based on comprehensive advice from leading tax experts in Uganda, the United Kingdom and North America, is that the disposal of the assets is not taxable in Uganda,” the company said.
Heritage argues that they are not under obligation to pay the tax.

But it “has also offered to deposit $108m with the Uganda Revenue Authority (URA) on receipt of the payment from its transaction, which would be refunded to Heritage if it is ultimately determined that no tax is payable.”

The United Kingdom-based oil company claimed that the offer of $108m was based on Uganda’s Income Tax Act, which requires a taxpayer to deposit 30% of the disputed amount of tax with the URA pending final resolution of the dispute.

Efforts to get a comment from energy minister Hilary Onek and his permanent secretary were futile.

However, the Financial Times yesterday quoted Onek as saying Uganda “would not budge” and that, like any company in Uganda, Heritage was liable for the tax.

He rejected arbitration in London.

“The oil fields are not in London. They (Heritage) are doing business here based on a national asset. They are obliged to pay the tax,” he said.
“If I were Heritage I would not go for arbitration. I would just pay my tax and get my super profit. I don’t understand that greed.”

Asked for a comment, Tullow Oil said they would buy Heritage’s interests as soon as the company sorted out its issues.

“It is clear that all parties support the transaction and that the Heritage tax issue is now the only matter outstanding,” said Jimmy Kiberu, the company’s spokesperson.

“We expect the Government of Uganda to give its approval of the transaction shortly after the Government and Heritage have agreed the mechanism for resolving that issue.”

ENI, on the other hand, said they are willing to pay the taxes plus the amount that Tullow was going to pay Heritage.
However, Tullow has the first right to purchase Heritage’s interests, provided they meet the Government’s conditions.

“ENI is ready to pay the amount due to Heritage and will respect the rights of Uganda’s Government by paying the taxes on top of the transactions,” said a company official.

ENI had entered into a sales agreement with heritage before Tullow preempted the deal.
Tullow said it had an agreement compelling Heritage to give them the first option in case it was selling its shares.

Prior to that, ENI spent close to $15m preparing an integrated oil and gas development plan for Uganda.

So far, two billion barrels of oil in reserve have been discovered in the Lake Albert basin, an amount that can meet Uganda’s petroleum needs for 25 to 30 years.

This is considered enough for commercial oil production and putting Uganda among the top 50 oil producing countries in the world.

Replies to This Discussion

Thanks Ibrahim. Indeed we at OSI funded the workshop where the 'American' trained MPs and CSOs. My concern is not yet about who pays and who fails to pay the taxes. I am concerned about the fact that we are being told about wrangles when we were not told about the terms. Access to information first. Contracts second, please. Secondly I will insist on what new diseases we are going to get, how many people are going to be displaced, what will happen to the environment etc when production of oil starts. Thirdly the process going on in terms of production, what are the rules governing it because I understand two laws are in draft form?

This oil will affect all Ugandans, I wonder why only the minority are claiming the right to complain in public.